Black Is White

By James Kwak

I wasn’t sure what the Social Security wage base was (it’s $106,800, by the way), so I Googled “payroll tax cap.” The number one hit is a post at a blog modestly called The American Thinker. I wouldn’t ordinarily want to bring more attention to it, but it was the #1 hit, and according to Quantcast it has a million unique visitors per month, so nothing I do will affect it one way or another.

Anyway, the thrust of the argument is that we shouldn’t eliminate the cap on wages subject to the payroll tax because “America simply can’t afford it.”

Such plans for expanding an already-huge entitlement are beyond irresponsible, they’re frightful.  Klein and Weller aren’t serious men.  When reading their ideas for Social Security expansion in this time of trillion-dollar federal deficits, one realizes that progressives are unconcerned about America’s fiscal crisis.

You read that correctly. The argument is that increasing the wage base, which would bring in more revenues and reduce the deficit, is a bad thing—because of our fiscal crisis.

This claim is based on the idea that uncapping the wage base would also mean that benefits would have to be uncapped. That does seem like the sensible way to do it. But the way the benefit formula is written, when you increase the wage base, revenues go up much more than benefits. That’s because after the second breakpoint your monthly benefit is only 15 percent of your average indexed monthly earnings. So raising the wage base reduces the deficit, which is a good thing in a “fiscal crisis.”

What’s more, the author seems to make this very argument later in the post, when he claims that Social Security is almost “pure welfare.” The Social Security-as-welfare argument is based (by people who know the facts, at least) on the fact that the benefit formula is progressive, which more than counteracts the regressiveness of the payroll tax. So yes, there is some redistribution. But the thing that causes redistribution is the same thing that causes an increase in the wage base to be deficit-reducing.

Probably everyone who reads this blog knows all this already. But apparently there are plenty of people who think—or will argue—that things are their opposites.

30 thoughts on “Black Is White

  1. If SS is its own account, how does it directly affect the deficit in the first place? Pardon me for being thick if I’ve missed something. Isn’t the premise of restricting the payout of benefits to keep the balance higher for a longer period of time, to serve as a ‘backstop’ to the deficit? Just like banks only need to keep ‘X’ dollars in their coffers in order to loan out ’80X’ dollars?

    Aside from that, I agree that the theory behind the American Thinker article is faulty.

  2. Whether and how Social Security affects the deficit is a complicated question that has pop-philosophical overtones. By law, Social Security cannot increase the deficit because benefits can only be paid out of the trust fund, and the trust fund is only funded by payroll taxes and interest on current balances (and a couple of tiny line items). This means that when the trust funds go to zero around 2036, by law, benefits will be restricted to current payroll taxes, which means they will be about 75 percent of scheduled benefits.

    One thing is that, should it come to this, I believe that Congress would vote to pay benefits out of general revenues. That seems more likely to me than stiffing retirees.

    Another way to look at it is this: (a) Social Security does increase the overall deficit but (b) it also specifies that the only way that deficit can be closed is by reducing benefits. By the usual economist’s logic, this is worse than a situation where only (a) holds—because then at least you would have a choice about how to fill the deficit. So on this reasoning, the current situation is worse than a situation where Social Security can dip into general revenues.

    The other way to look at it is to look at the federal government as one entity. Social Security’s impact on that entity is to bring in payroll taxes and pay out benefits. From that perspective it’s clear that SS contributes to the overall deficit.

  3. Bing doesn’t show that American Thinker piece anywhere on the first page. But it returns this 2004 piece from the National Center for Policy Analysis — Eliminating the Social Security Payroll Cap: A Bad Idea. Some interesting points …

    o A new Social Security Administration report estimates the effect of removing the payroll tax cap. It assumes wages subject to the tax will decline as many workers shift their incomes from covered wages to income sources not covered by the tax like stock options or other benefits.

    o … earners in the top income tax bracket (35 percent) would pay more than half of each additional dollar they earn in taxes.

    o Increasing the marginal tax rate will have adverse economic consequences. The Social Security payroll tax already has an economic cost. According to a recent NCPA study by economists Liqun Liu and Dr. Andrew J. Rettenmaier of the Private Enterprise Research Center at Texas A&M University , the current system encourages people to work fewer hours and produce fewer goods and services, relative to an efficient tax system

    o Eliminating the cap would constitute the largest tax increase in American history … Over the first 10 years, it would cost the economy nearly $136 billion in lost growth and cause the loss of more than 1.1 million new jobs.

    o elimination of the payroll tax cap pushes back Social Security’s first negative cash flow year for only seven years, and increases the Social Security trust fund’s bonds by some $3 trillion. But like the holdings of the current trust fund, every dollar is spent and must be raised again when the bills are due.

    Conclusion. While eliminating the Social Security payroll tax cap would reduce the funding gap somewhat, it has only a marginal effect and comes with a huge economic cost.

  4. Mr. Kwak, could you please explain to your readers the difference between a “deficit” in a monetarily sovereign country, and a deficit in a country that is not monetarily sovereign? And coud you include examples of such countries? Thanks.

  5. Hi there, James.

    “The American Thinker”? Now that sounds like more of the “death cult” (GOP) meme, being muttered by the GOP field of clowns.

    Reminds me of the William F Buckley impersonation I used to do as a kid. I could do Nixon, and Kissinger, also…..seems my talent was imitating tools.

    Anyway, the entire message is false, that being SS is unfixable, insolvent, or needing radical surgery or elimination to fix the “problem”.

    Social Security is, without qualification, the most successful program in world history that allows people to pay their rent, maintain their homes, feed themselves, and have a decent existence in life’s later years.

    The removal of the wage base limitation, capped at a pitiful low level, keeps this program solvent, and allows Americans to live like human beings, as opposed to miserable wretches.

    If you want to see further ruination of America, your dream ticket is the republican party. For them, the rich pay no taxes, and the little people pay ALL the taxes. How blind do you have to be to not see it?

  6. I seem to recall that back before the Johnson administration the federal budget calculations did not include the revenues and expenditures of the Social Security system. The overall buget was consolidated in the 1060’s. The Social Security System still has its own books, and until recently the social security tax receipts have exceeded the benefit disbursments. The accumulated funds are still sufficient to cover disbursments. When cash inflows have exceeded the disbursements, the surplus has been invested in (special) federal securities. At some point in time the SS benefit payments exceed current SS tax receipts, the SS system will redeem those federal securities; where will these funds come from? The funds will come from the US treasury receipts from other taxes. Changing the cap on the amout of income subject to SS taxes is an interesting exercise in shifting around the deck chairs, but it may have little relevance to the actual federal deficit.

  7. Published on Friday, September 23, 2011 by The Guardian/UK
    A Billionaires’ Coup in the US
    The debt deal will hurt the poorest Americans, convinced by Fox and the Tea Party to act against their own welfare
    by George Monbiot

    “…What’s taking place in Congress right now is a kind of political coup. A handful of billionaires have shoved a spanner into the legislative process. Through the candidates they have bought and the movement that supports them, they are now breaking and reshaping the system to serve their interests.”

  8. Yeah, Bruce, and all those knuckle-dragging, mouth-breathing, Hannity-O’Leilly-Beck viewers, can’t differentiate between a hole in the ground, and their….OK, I’ll stop, this is a family blog.

    But, I think the point is dumbed-down-on-purpose people are pretty easy to persuade.

  9. Yes, it is an Alice-in-Wonderland “what is up, is down” world we live in.

    Perception management, lies, distortions, covert actions — the game is called “Live Backwards” (i.e. eviL).

    Caveat Cives

  10. No James, we don’t want to raise/elim the wage cap because the government is not entitled to more revenue. You seem to believe that people live/work/love to serve the revenue needs of government. Like the copper top batteries in The Matrix. Not to late to set you free from the collective corporate illusion James.

  11. Let’s see … by reading the “About” section of The American Thinker, we find these people, among others:

    Rick Moran, blog editor, is a professional writer/editor living in Streator, IL and a frequent contributor to American Thinker. He also serves as the Chicago editor of Pajamas Media and is the proprietor of the website Right Wing Nuthouse.

    Marc Sheppard, environment editor, is a senior partner in a technology consultation and software development firm on Long Island, where he lives with this wife and three children. A healed former liberal, he swapped his subscription to Rolling Stone for National Review over twenty years ago.

    Richard Baehr, chief political correspondent, is a management consultant in the health care field and is the president of Richard A. Baehr & Associates. … Richard was recently named a Visiting Fellow of the Jewish Policy Center, and he was a panelist for a Jewish Policy Center Forum along with Michael Medved, John Podhoretz, and David Horowitz. …

    J.R. Dunn, consulting editor, has been involved in several fields of business including real estate, infotech, and PR. … As a writer, J.R. has published three critically acclaimed novels: This Side of Judgment (1994), Days of Cain (1997), and Full Tide of Night (1998). He has also published a number of shorts and articles in various magazines and anthologies.

    Additionally, J.R. worked on the academic encyclopedia The International Military Encyclopedia (1992- ) as associate editor for twelve years.

    His first book on politics deals with the inexplicably overlooked fact that liberal policies (criminal justice “reform,” the CAFE standards, the DDT ban, etc.) tend to kill Americans by the tens of thousands. Provisionally titled Death by Liberalism, the book will be appearing later this year.

    This really ought to be everything you need to know about The American Thinker.

  12. It disturbs me greatly to listen to lie after lie from the right. As you say, black is white, false is true, on and on. I fear the conservative big lies are much like what was described in Mein Kampf as being successful politically: if you repeat a lie often enough, people come to believe it. Or, as the song goes in the musical “Dear World”, if you wear artificial pearls long enough, everyone knows “the pearls become real”. But they don’t of course. The scary part is what happened with that guy, Adolf, and whether the conservative think tanks and their paid manipulative brains are taking us down a similar path. It was GWB who claimed weapons of mass destruction and started two wars without planning to fund them, after all. We’re headed in the wrong direction, guys. Well, half of the country is, and they’re keeping the other half from moving on.

  13. Oh, for goodness sakes, Mary L. Cole, it was BHO who claimed he was bringing change we could believe in, and sold out instantly by appointing Summers and Geithner. He has extended and expanded the wars, reneged on every promise he ever made, and is about to sell Medicare and Social Security down the conservative river.

    The idea that we have two functioning political parties is ludicrous. NOBODY is serving the American people, because they are all too busy helping themselves to the all-you-can-eat political buffet.

    Go to the following link and — this is important — READ THE TRANSCRIPT. I dare ya.

  14. This comment addressed to Christopher Whalen,

    You know Chris, every I would say roughly 6 months, you have extremely short (and I emphasize short) moments when I want to applaud you. Say for example when you took on the CNBC on-air staff over the weakness of French banks and the Societe Generale fiasco. CNBC on-air staff doing their usual big banker lap-dance, so the next time they go out in Manhattan or NYC Greater they might have an IOU for being a big bank propaganda whore note stuffed into the front of their panties. And watching that particular show I felt confident David Faber got his note stuffed into the front of his favorite shade of pink.

    I do sincerely applaud you for challenging the usual CNBC cheerleader propaganda on that Mr. Whalen.

    Other times, like your comment above Chris, when you don’t address the core point of the post, I wonder why someone as sharp as you with a bully pulpit to speak from, feels the need to troll for his twitter account.

  15. The central argument is that those making more than the cap will do a greater economic good with what they retain compared to the good that will be created by making social security solvent. From a stimulus argument, who is more likely to spend the money (a demand side argument)? Surely the multiplier is much greater in the latter case. Therefore, the only argument is the the well-off are more likely to dazzle entrepreneurially the rest of us, thereby expanding markets. A supply side argument, still in vogue. Destined to be derided by coming generations as they sift through the virtual rubble with the forensic reconstruction. I wonder if the case study will be labeled Hubris 101.

    The subtext here is that if you goal is to undo the New Deal, you want to bankrupt its programs, so any step that mitigates the process is to be opposed. My grandfather fancied himself a stoic, self-reliant Republican (and a Mason and a car mechanic). To wit, my father related to me that when FDR died, my grandfather and his friends practically cheered. But despite his planning, my grandfather exhausted his savings by living to be 96. In his later years he depended on those SS checks which allowed him to maintain some level of independence.

    You would think that enlightened self-interest might make the haves more receptive to keeping the have-nots (or the have-lesses…not as euphonius a moniker) from starving, but that would be ignoring rule #1 (people are stupid). Or perhaps the insularity of the gated community simply allows the haves to wash their hands, like Pilate, of the plight of the little guy.

  16. James,

    2036 is just 25 years away. Anyone who is 45 this year will be turning 70 that year. I say this to put it into prospective based on a person’s age today and how it will affect them when they retire.

    An interesting side, this particular group is the end of baby-boomer generation/ start of Gen X. They also came of age during the economic downturn of the early 80’s, which traditionally means they are paid overall less than the earlier baby-boomers and are more likely to have started their own business, which means they may have put less into the SSI system for a longer period of time in relationship to those before them and those who came of age just seven years later. This would suggest, this group needs to seriously think about increasing their retirement savings now and keeping their job skills current.

    It could be advantageous to find out, since many, not all, of our “legislative fiscal conservatives” are from this age group, how the 80’s recession affected their views on government intervention and the Federal Government’s talk, roughly during this same time, about SSI not being able to handle the baby-boom generation, which may have created the belief (true or untrue as you have pointed out) that SSI is a Ponzi scheme. And does the concept of theory vs. practice, which seems to have become prevalent during this time frame, add to these issues.

  17. For those who think they are leading some “power to the people” movement by using BING, you’re only proving their own vast ignorance, and how easy it is for the affluent to elbow the great illiterate masses from one sink hole into another. BING search engine is owned my Microsoft. For those not keeping score very well, Microsoft Corp is not exactly for “the little guy”. So that’s really the democratic technology equivalent of some brain dead woman in the 1960s thinking she has gained her freedom by burning her bra and becoming a waitress at a Playboy club. seems like the best alternative search engine to Google to me. But I would love to read Mr. Kwak’s thoughts or others’ thoughts on that, if it’s not too rude to break off topic in the name of education.

  18. In addition to removing the cap on earnings it also should be broadened to include such things as carried interest earned by hedge fund managers, capital gains etc.

    Also the present deductions of medical flex accounts and deductions employees pay for dental and medical insurance should be eliminated from the income that pays social security taxes. This latter point is very important because unknown to almost all participants of these programs those very deductions will result in them having a lower social secutity income when they retire.

    But there is another important change which must occur, that is to establish serveral more bend points in the formula for calculating benefits based on average inflation adjusted income. At present there is only one bend point. Below that low wage workers receive a much higher portion of their average lifetime inflation adjusted earnings in the social security benefits. For all income above the bend point the proportion that ends up as a lifetime benefit is much smaller.

    This concept needs to be extended by establishing new bend points at strategic points for lifetime average inflation adjusted earnings. For example James says the current cap is $106,800. Put the first new bend point here at $106,800 such that income above this amount pays the same payroll taxes but the benefits those payments earn are much less than for the income between the existing bendpoint and $106,888. Other bend points might be set at $200,000, $400,000, $750,000, and $1,000,000 as examples.

    What this would do is greatly expand revenue while benefits expansion was only a fraction of the increased social secutity taxes paid.

    I’m confident that if someone ran the numbers on this proposal, they would find it would preserve social security into perpetuity.

  19. If we don’t go to “no cap” on payroll taxes for Social Security, at least we could raise the cap by, say, 50%.

    That said…and on another subject but tax-related, here is a proposal by a Republican candidate that is making my head explode. Maybe you folks can help explain whether I am missing something here.

    Herman Cain’s 999 Tax Plan calls for the following:

    9% Corporate Tax
    9% Income Tax
    9% National Sales Tax

    When you add a new 9% National Sales Tax to the various State sales taxes
    wouldn’t this mean that the net sales in most states becomes a massive, for example:

    Texas Sales Tax = 8% + 9% Herman Cain Tax = 17% Sales Tax in Texas
    New Jersey Sales Tax = 7% + 9% Herman Cain Tax = 16% Sales Tax in NJ
    South Carolina Sales Tax = 9% + 9% Herman Cain Tax = 18% Sales Tax in SC
    Idaho Sales Tax = 6% + 9% Herman Cain Tax = 15% Sales Tax in Idaho

    Or does Mr. Cain expect the states to eliminate their sales taxes, which would destroy their already insolvent balance sheets.

    Either way, seems to mean this plan either bankrupts the citizens or bankrupts the states
    Am I missing something?
    Have any of the debate moderators asked Mr. Cain about this?

  20. “The number one hit is a post at a blog modestly called The American Thinker . . . according to Quantcast it has a million unique visitors per month”

    Forget Social Security. The fact that this country is so piss ignorant that a reactionary imbecile like American Thinker gets a million hits a month is the REAL crisis.

  21. @Charles Acai:

    If so, the total sales tax regime would be very similar to that in British Columbia, where a provincial tax is levied on top of the national goods/services tax to the tune of about 17%. This level of consumption taxation is not far behind that in the Eurozone. As a means to steer consumers away from excessive consumption, this would certainly be effective. But it would be very regressive
    However, I doubt that Cain has thought out the implications of his proposal.

  22. James, Your statement “You read that correctly. The argument is that increasing the wage base, which would bring in more revenues and reduce the deficit, is a bad thing—because of our fiscal crisis.” is a lie. Jon Hall did not refer to eliminating the cap as fiscally irresponsible, but the expansion of SS benefits that Christian Weller proposed.

    – Create a minimum benefit level.
    – Raise benefits for SS beneficiaries over the age of 85.
    – Improve survivorship benefits.
    – Strengthen divorce benefits
    – Introduce family caregiving benefits for workers with (an infant or newly adopted child, family members who are elderly, or seriously ill, or recovering from a serious illness).
    – Expand spousal benefits to married same-sex couples.
    – Phase in progressive changes to benefit the formula.

    Weller does propose a means of paying for these expansions, which does include eliminating the cap. Whether Hall’s criticism of Weller’s proposal as “fiscally irresponsible” is justified can be debated, but you should at least have the integrity to honestly characterize Hall’s criticism.

  23. @jeff simpson opined, “Or perhaps the insularity of the gated community simply allows the haves to wash their hands, like Pilate, of the plight of the little guy.”

    Allow me to contribute to Hubris 101 course correction. Pilate washed his hands of the plot by a powerful local government *cult* that wanted Pilate to do the dirty work for them – judge an innocent man to be guilty of made-up, un-prove-able charges. Pilate was not washing his hands of the *little guy* by that gesture. Let me know if you need the links from which this correction comes…

    But let’s go back even further in history repeat, deja-vu, rinse, lather, repeat, etc.

    “Successful crime goes by the name of virtue.” from Seneca the Younger 4 B.C. – 65 A.D.

    Grandpa lived until 98 – so his savings from an electronics job went before he died, also. And when the thieves found the last packet, it evaporated overnight and then they found the connection to me and I ended up losing my house because of who caught the scent after that – the Patriot Act, indeed. Who were the first people to get jobs in THAT department – enronsitas et al – yup the phone guys. So many of them seriously belong behind bars.

    The dismantling of Social Security absolutely can’t be sold as a virtue.


  24. What is not taken into account in this article are the Medicare premiums, deductibles & co-pays that Social Security recipients pay out of their benefits.

    The Part B/D premiums alone remove a minimum of $1345/ year out of an average $12K/year Social Security benefit. The MD visit, diagnostic procedure, hospital visit, device deductibles and co-pays (Part B) and Part D deductibles & Rx co-pays are paid out over the year by the SS recipient.

    Also, while the current COLA formula (CPI-W/CORE CPI – food & energy costs, etc. not included in this measure) has frozen benefits for the past 3 years, the co-pays for Part D Rx drugs have continued to rise.

    The current freeze will now extend through 2012.

    The Part D 2012 information packets have now arrived & the Part D minimum premium rise of $27/year will bump the above total premium figure to $1372/year out of the same benefit figure.

    The drug co-pay $ figures are unknown as they are only given as a percentage of the total Rx cost.

    Since 26% or more of Social Security recipients depend solely on their benefits & SNAP (food stamp) benefits have also been cut, there may be one reason to repeal the income cap completely & make additional income sources subject to the FICA tax – to keep your parents or grandparents alive and able to pay for their food & some of their medical costs.

  25. Here is how the Congressional Research Service summarized the law shortly after its passage:

    “The Act gives federal officials greater authority to track and intercept communications, both for law enforcement and foreign intelligence gathering purposes. It vests the Secretary of the Treasury with regulatory powers to combat corruption of U.S. financial institutions for foreign money laundering purposes. It seeks to further close our borders to foreign terrorists and to detain and remove those within our borders. It creates new crimes, new penalties, and new procedural efficiencies for use against domestic and international terrorists. Although it is not without safeguards, critics contend some of its provisions go too far. Although it grants many of the enhancements sought by the Department of Justice, others are concerned that it does not go far enough.”

    whole article here:

    That SUPER COMMITTEE is meeting *in secret* today and the spinmeisters are saying that is what the people did back when Declaration of Independence was drafted and government organized – THAT was done *in secret* also! That’s INSULTING political spinmeistering – the repeating phrase on all the blogs today is “PEOPLE ARE STUPID”.

    The Patriot Act was set up to vest the Secretary of the Treasury with the right to intercept communications (destroy the right of the individual citizen to any PROTECTION – privacy IS protection that serves the individual!) without approval from the Justice Department.

    I’m sorry, but what part don’t people understand about this massive manufacturing of POVERTY in the USA? This is truly EPIC.

  26. to be devoid of thought, yet style yourself the american thinker, is typical of propaganda (Ministry of Peace, via orwell 1984) but is even more common in ordinary buisnesses.
    whenever you hear an ad campaign that says “famous for customer service” you know that people have been complaining to the floor manager about the cruddy customer service; whenever you hear renowned for quality, you know they just outsourced to China and cut quality.

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